9.

Family Ownership
Jakob Arnoldi
Emerging Markets
Please read the first two pages
• https://search.proquest.com/docview/1619356508?accountid=14468

What is the explanation for the prevalence of family businesses in emerging markets given on Page 2 “until
recently…” ?

What is the general term(s) we apply to explanations such as these?

Background
Renewed interest in family ownership and management because:
• Many firms, also in developed economies are family owned (see
http://familybusinessindex.com/#map);
• family ownership even more prevalent in (increasingly important)
emerging markets;
• findings indicating that family firms may bring performance benefits.
Family what?
• Family ownership.
• Family management (control)
• Supervision?
• Different constellations involving one or more of the above.
Family management (four different
perspectives)
• Effort school – incentives.
• Ability school – which special
abilities (or lack thereof)
explain performance/behavior.
Agency theory – incentives to
not be opportunistic except
for expropriation of non-family
minority shareholders.
Stewardship theory – Family
businesses represent ‘socio-
emotional wealth’,
parsimonious use of
resources.
Stewardship inspired approaches
• Control; loyalty.
• Parsimonious use of resources.
• Legacy to coming generations = long term strategizing.
• Good stakeholder relations.
Agency theoretic based approaches
• Reduces P-A problems.
• Family ownership in emerging markets leads to expropriation
(tunneling).
• Family owners exploit institutional voids to expropriate.
• Earnings management.
• Propping.
• Rent seeking alliances between government officials and family
businesses
Other theoretical perspectives
• Social ties/informal mechanisms
• Reduces internal conflicts.
• Reduces transaction costs.
• Improves stakeholder relations.
• Reduces pool of talents, efficiency of markets etc.
• Flexible supply lines.
• Lower costs of raising capital.
• Higher employee motivation.
• Reduction of individual opportunism.
• Improved innovative capabilities.
• And see above: Fewer internal conflicts = reduced transaction costs.
Downsides of family management

• Demotivating and illegitimate management

• Authoritative managerial culture dampens exchange of ideas and
innovativeness.
Is family ownership linked to emerging
markets?
If so, due perhaps to institutional voids, perhaps to cultural factors.
• Imperfect market for managerial talent
• Imperfect market for takeovers
• Positive externalities (loyalty, stakeholder relations etc.) related to contract
enforcement costs
• Imperfect capital markets means internal accruals and family social capital are
more important
• Imperfect enforcement of law and lack of oversight makes such accruals (and
earning management) easier.
• Internal accruals lead to business group formation – itself mitigating same
imperfections
Stewardship vs. agency theory in the context
of emerging markets
• Family ownership may either exploit or compensate for institutional
voids in emerging markets.
Drivers for retention of control/concentration
of ownership
• P-A problems not reduced by formal institutions.
• Social capital more valuable due to institutional voids and market
imperfections (and cultural factors).
• Expropriation possible – due to institutional voids.
Example from Claessen et al 2000 The Separation of Ownership and Control in East Asian Corporations.
Other questions
• Separating family ownership from majority ownership.
• Distinguishing between first generation (founder) family management
and later generations.
• Combinations of family and non-family management.
• Agency problems within families?
Summation
Family businesses associated with a series of factors/qualities:
• Informal control and coordination mechanisms that can be effective
(and will be even more effective in emerging markets)
• (Incentives for) parsimonious and committed management and
leadership and strong stakeholder relationships
• Expropriation, propping and earnings management.
• Nepotism and rent seeking.